Bank card deal on watch: It doesn't happen very often

In a rarity for the bank credit card sector, Moody's Investors Service last week placed several B-class notes of multiple deals from People's Bank on review for possible downgrade.

Since the early 1990's there have been no Moody's-downgraded bank card deals, and only a small handful of deals put on review.

"There have been instances where credit card transactions were placed on review due to deteriorating asset performance, in which case the issuers voluntarily supported their transactions, resulting in a confirmation on the ratings," said Joseph Snailer, a vice president and senior credit officer at Moody's.

In the last few years, bank credit card deals have been more apt for upgrades, as seen in trusts from Citibank, First USA, and, most recently, Fleet.

In February, credit card delinquencies and charge-offs were trending up significantly, enough to break a string of 32 consecutive year-over-year improvements, according to Fitch. Although the People's Bank action comes on the heels of the first signs of deteriorating consumer credit in this slowing economy, these deals have historically performed below par.

In fact, according to Moody's, the People's Bank master trust has shown rising defaults over the past several years, while the industry average was moving in the other direction.

A recent spike in charge-offs can be attributed to the bank repricing its lower credit borrowers, the rating agency said. Typically, some of those borrowers will default, given the heavier debt burden resulting from the rate hike.

The deterioration of People's Bank's portfolio signifies the difficulty of smaller players competing for market share.

"The top few issuers comprise the vast majority of total outstandings, and then the numbers fall off pretty steeply for the remaining six or so that make up the rest of the sector," said William Black of Moody's. According to Moody's, the top ten issuers make up more than 80% of the market, and the top three, including Citigroup, MBNA, and Banc One (First USA), make up approximately 44% of the market.

People's Bank has relied on balance transfers and low introductory rates to gain market share. The issuer has had a difficult time retaining obligors when the teaser rates end, Moody's said.

People's Bank recently sold its European credit card business to Citigroup for about $526 million, which includes about $426 million in receivables. People's Bank is based in Bridgeport, Conn. and more than one-third of its branches are in supermarkets run by the Stop & Shop retail chain.

Note: In the early 1990s, several bank credit card deals were downgraded, although those actions were not tied to asset quality, but rather to downgraded credit providers. In those days, deals tended to feature bank-issued letters of credit (LOC).

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